Practical financial management 7th edition by colin barrow

Preface xviiPart 1: Assembling financial data The accounts you have to keep 5; Getting some help 13 Why cash is king 15; The structure of the cash flowstatement 15; Avoiding overtrading

Practical Financial Management

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Practical Financial Management

Colin Barrow

7TH EDITION

A guide to budgets, balance sheets and business finance

Publisher’s note

Every possible effort has been made to ensure that the information contained in this book is accurate at the

time of going to press, and the publishers and authors cannot accept responsibility for any errors or

omis-sions, however caused No responsibility for loss or damage occasioned to any person acting, or refraining

from action, as a result of the material in this publication can be accepted by the editor, the publisher or the

author.

First published in 1984 as Financial Management for the Small Business

Second edition published in 1988

Third edition published in 1995

Reprinted in 1997

Fourth edition published in 1998

Fifth edition published in 2001

Reprinted in 2002

Sixth edition published in 2006

Seventh edition published in 2008 as Practical Financial Management

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted

under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or

trans-mitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of

reprographic reproduction in accordance with the terms and licences issued by the CLA Enquiries

concern-ing reproduction outside these terms should be sent to the publishers at the undermentioned address:

Kogan Page Limited

The right of Colin Barrow to be identified as the author of this work has been asserted by him in accordance

with the Copyright, Designs and Patents Act 1988.

The views expressed in this book are those of the author, and are not necessarily the same as those of Times

Newspapers Ltd.

British Library Cataloguing in Publication Data

A CIP record for this book is available from the British Library.

ISBN 978 0 7494 5273 5

Typeset by Jean Cussons Typesetting, Diss, Norfolk

Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow

Preface xvii

Part 1: Assembling financial data

The accounts you have to keep 5; Getting some help 13

Why cash is king 15; The structure of the cash flowstatement 15; Avoiding overtrading 16; Estimating start-upcash requirements 17; Cash flow spreadsheet tools 18

The difference between profit and cash 19; Structuring theprofit-and-loss account 19; Dealing with debtors andcreditors 24; Handling depreciation 26; Cost of goods sold 26;

Profit and loss for a service business 27; Profit-and-lossspreadsheet tool 29

A personal experience 30; The public picture 36; The structure

of the business balance sheet 38; The ground rules, conceptsand conventions 42; Accounting for stock 47; Methods ofdepreciation 47; The capital register 48; Preparing a package

of accounts 49; Balance sheet and other online tools 49

Contents

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Part 2: Understanding the figures

5 Funding strategies, safety and performance 57

Debt vs equity 57; Using your own resources 59; Borrowingmoney 62; Getting an investor 69; Going public 72; Freemoney 75

Levels of profit 76; Working capital relationships 77; Return

on investment (ROI) 78; Market tests 79; Combined ratios 80;

Getting company accounts 80; Ratio analysis spreadsheets 82

7 Costs, volume, pricing and profit decisions 83

Adding up the costs 83; The components of cost 84; even point 88; Margin of safety 90; Costing to meet profitobjectives 90; Costing for special orders 92; Real-time internetpricing strategies 93; Costing for business start-up 94; Costing

Break-to identify unprofitable products and services 96; Getting helpwith break-even 98

Budgeting for a business 109; Timescale and detail 111;

Objectives 112; Market appreciation 115; Forecasting sales 118;

Resources appreciation 120; Key strategies and operatingplans 125; Setting the budget 127; Budget guidelines 127;

Monitoring performance 128; Flexing the budget 129; Seasonalityand trends 130; Cash and capital budgets 131; Building a budgetmodel 131

0 8 4 5 6 0 2 0 4 8 5†

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more through our entrepreneurial approach Our range of

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secure the Business Moneyfacts ‘Best Overall Business Bank’

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The bottom line is,

businesses

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Amount based on sample of 8884 customers who switched to us from another bank and had their charges verified during January 2008.

The sampled customers who moved to a 12-36 month free* business banking period with Bank of Scotland saved £8.3m in 2007 on

their previous banks’ standard transaction charges and fees *Bank of Scotland Business Banking is free from standard transactions for

an agreed period Charges will still apply for special services e.g CHAPS payments and if the account exceeds its authorised overdraft

limit † Calls from BT landlines to 0845 numbers will cost a maximum 4p per minute and a 6p call set-up fee The price of calls from

other telephone companies will vary Call cost correct at May 2008 Details are correct at time of print (June 2008) and are subject

0 8 4 5 6 0 2 0 4 8 5†

www.bankofscotlandbusiness.co.uk

Get in touch, or visit any Bank of Scotland or Halifax

branch and we’ll show you how much better off you’d

be with us We think you’ll agree, it all adds up.

But money isn’t everything, and although we made impressive

savings for the businesses that switched to us last year, the

reason that they stay is our business banking gives them much

more through our entrepreneurial approach Our range of

innovative products along with competitive rates have helped us

secure the Business Moneyfacts ‘Best Overall Business Bank’

award for the last 3 years running (2006-2008).

The bottom line is,

businesses

that switched to us last year

Amount based on sample of 8884 customers who switched to us from another bank and had their charges verified during January 2008.

The sampled customers who moved to a 12-36 month free* business banking period with Bank of Scotland saved £8.3m in 2007 on

their previous banks’ standard transaction charges and fees *Bank of Scotland Business Banking is free from standard transactions for

an agreed period Charges will still apply for special services e.g CHAPS payments and if the account exceeds its authorised overdraft

limit † Calls from BT landlines to 0845 numbers will cost a maximum 4p per minute and a 6p call set-up fee The price of calls from

other telephone companies will vary Call cost correct at May 2008 Details are correct at time of print (June 2008) and are subject advertisement feature

Getting the most from your business bank

What is it that SMEs look for in a business bank? Is it value for money

or quality of service? The answer of course is both By retaining the Business Moneyfacts Best Overall Business Bank accolade for the last

3 years, Bank of Scotland has firmly established itself as a major player

in the business banking market.

SMEs have, for too long, received a poor deal from their High Street banking providers With a combined market share of 80%, the Big Four High Street banks continue to enjoy a monopoly on the provision of products and services

to SMEs It is the most concentrated sector in UK banking and consequently, there is little incentive by these banks to improve the deal that they offer small businesses

In recent years, Bank of Scotland has taken up this challenge of becoming the first British bank to bring consumer pricing to the business banking market.

Offering both superior pricing on products alongside a first-class service to customers, Bank of Scotland is finally offering SMEs the deal that they deserve

The best deal for business

Over the course of the last year, Bank of Scotland has revolutionised the business banking market by introducing a number of firsts for small businesses.

In October 2007, we launched the market leading Total Business Account which offers an interest rate that is 4 times higher than is paid by any other bank Another first saw the launch of the first ever offset account for business customers, giving businesses the opportunity to combine a Business Banking Offset Loan and a Business Banking Offset Account, potentially saving thousands of pounds on loan or mortgage repayments

Customers switching over from the Big Four also benefited from their leading deals SMEs switching over to Bank of Scotland from the competition saved nearly £8.3million last year Under their Guaranteed to Beat proposition

market-on their Business Current Account, they promised to pay out £1000 if unable to beat the business banking deal of any customer switching from the Big Four**

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Exceptional people sharply focused on their customers

It’s not just well-priced products that small businesses are looking for their business bank to provide Overall, small business owners would like to receive excellent value for money and a first class service from a bank that understands the financial requirements of their business At Bank of Scotland, we pride ourselves on the quality of our people and the experience of business banking that we’ve built up over 200 years The Bank invests heavily in its people, maintaining what is considered as the best team of Business Managers in the business With expertise in business finance, our Business Managers deal with businesses of all types so they have a breadth of knowledge that’s second

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Of course, there is still a huge amount of intransigence within the small business market – even from those businesses who are unhappy with their current providers Research carried out by Bank of Scotland Business Banking showed that fewer than one in ten (8%) small business owners had moved their business bank account in the past three years Just take a moment to consider whether you or your clients’ current banking arrangements are giving you all you need to help your business If the answer is ‘No’, why not switch to a bank that can support your business every step of the way?

* Source: Small Business Predictions research (Dec 07)

** This offer is available to customers who currently bank with Lloyds TSB, Natwest, Barclays

or HSBC, have a turnover of £50,000 or more and are on a published tariff and not a free deal.

Accounts are subject to status.

Contents xiii

Average return on capital employed (ARCE) 134; Paybackperiod 136; Discounted cash flow 138; Present value 140; Theprofitability index 142; Internal rate of return 144; Risk andsensitivity analysis 147; Dealing with inflation 148; Appraisinginvestments 148; Some general factors in investment decisions 148;

Online capital budgeting calculator 149

Why you need a business plan 151; Contents of the plan 152;

Tips on communicating the plan 155

Part 4: Dealing with regulatory authorities

Sole traders and partnerships 162; Company taxation 164;

Which structure is best? 165; Minimising taxes 166; Dealingwith employment taxes 168; Value added tax (VAT) 168;

Surviving a tax investigation 173; Help and advice with taxmatters 174; Finding a low-tax country 174

Their impact on financial procedures 179; Sole traders 179;

Partnerships and limited partnerships 180; Limitedcompanies 181; Cooperatives 182; Help and advice onbusiness ownership matters 183

Directors’ duties 184; The Companies Act 2006 185; Holdingboard meetings 186; Appointing a company secretary 186;

Taking on auditors 187; Wrongful trading and othermisdemeanours 188; Dealing with business failure 188;

Non-executive directors 190

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way of bartering has proven effective for a wide range of companies

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Atul Bhakta, Director, One World Express Couriers

to a network of new business opportunities.

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In difficult economic times businesses need to find innovative and effective tools to provide growth and increase profit Bartercard is such a tool and recently

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long line of awards that have followed the impressive growth of Bartercard since its inception in Australia seventeen years ago.

Bartercard is the world’s largest and fastest growing trade exchange with a worldwide network of more than 55,000 businesses, trading with each other in a vast array of products and services It has its own currency called trade pounds and one trade pound equals one pound sterling.

Recently appointed UK Managing Director Tim Ashley Sparks says “Bartercard offers enormous advantages to businesses at any time, but when we experience poor economic conditions such as we are now facing, it comes into its own Businesses – especially small to medium size businesses (SME’s) – are always looking for a competitive edge, always have cash pressures and always have a strain on resources that constrains their ability to grow.

“What we do at Bartercard is to partner our members to help them achieve their short and long term objectives With our local franchise offices working closely with the members we can deliver new customers and valuable new business giving the competitive edge that they are looking for, whilst at the same time reducing their cash expenses and thus improving cash flow.”

If you were a business that needed to make purchases for the products or services that you use in the normal day to day running of your business, would you rather pay cash for these items or pay with your own product or service?

As an example, if a restaurant needs £1000 worth of printing and they are not part of the Bartercard network, they have no choice but to write a cheque for £1000.

However, in Bartercard they could go to a Bartercard printer to receive the same product, price and service but when the printing was ready a simple voucher is completed which triggers the transfer of the ‘payment’ of £1000 trade pounds from the restaurants account to the printers account.

This means that the printer has been paid immediately – no bad debts – and the restaurant has received his printing having taken no cash out his business.

Now, the local Bartercard office works with both businesses – in the case of the restaurant, bringing in other Bartercard members as new customers Every time these customers spend it reduces the debt for the restaurant, so as well as saving cash the restaurant has actually paid for his printing with food and drink, and £1000 worth of meals costs the restaurant much less than £1000.

to day business spending.

Tim Sparks comments “one of the big problems for businesses in tough times is that they are forced to cut back on things that are even more important than in good times such as marketing, advertising and training How much more of this essential spending could a business do if they were not having to use cash but were paying for such services with their own spare capacity Not only can businesses increase promotional spend, but the resultant increased revenues are cash revenues therefore further enhancing their cash position.”

Bartercard’s UK business has over 5000 members in all business sectors and is growing rapidly The model of local offices ensures that members are properly supported and members are allocated their own account manager to work with them

as they develop and grow Members can trade locally, nationally and internationally in any of the 18 countries that Bartercard operate.

Tim Sparks says “The UK can easily support 100,000 members so the opportunity for

us is enormous We have focussed the business on growth and are seeing the benefits every week We have also recently reignited our drive to expand the franchise network and to this end we have recently appointed Brian Whitford MBE in the role of Business Development Manager to take responsibility for the sale of new franchises and the co-ordination of the marketing function Mr Whitford joined Bartercard at the end of 2004 as a franchisee, after a successful international business career In the following three years he built his franchise to 500 members, so he has actually worked the model and is therefore perfectly placed to combine his previous experience with that of the Bartercard experience to ensure that we choose the right people to work with us to deliver the significant future growth that is our goal.”

Brian Whitford commented “a Bartercard franchise offers the opportunity to build a large and successful business with all the benefits of having a major brand behind you and a dynamic and highly experienced central support structure We offer an unparalleled support package to our franchisees and have the philosophy that we're

in it together and in it for the long term.”

If you would like to find out about membership or a franchise contact Brian Whitford

on 0845-219-7000 or e-mail: brian.whitford@uk.bartercard.net

The long queues of depositors snaking around branches of Northern Rock, the

investors, managers and employees of the collapsed Independent Insurance,

once the ninth-largest insurance company in the UK, and the 25,000 or so

self-employed businesspeople and companies that are bankrupted or put into

liquid-ation each year have more in common than they might have thought All were

to a greater or lesser extent ignorant of or ill served by the accounts they should

have been able to rely on to inform them of the safety and performance of the

businesses concerned

In the case of Northern Rock the over-dependence on a single source of

finance and high gearing were the heart of the problem For Independent it was

the actions of a handful of directors attempting to disguise the true financial

position of the company The net effect of their ‘window dressing’ was that the

annual accounts showed a £22 million profit rather than the loss of at least £180

million that was the true position

For the tens of thousands of failed businesses the most common cause for

closure is poor financial control Indeed, surveys of businesses routinely

indi-cate that a third of failures are accounted for in this manner Directors and

managers frequently leave financial questions to their accountants to sort out at

the end of the year They often have the mistaken belief that keeping the books

is an activity quite divorced from the ‘real’ task of getting customers, making

the product or delivering great service By the time the figures are prepared by

the accountant, most ailing businesses are already too far down the road to

financial failure to be saved Even the few businesspeople who do ask for

advice, perhaps from an accountant or a bank manager, often do not understand

the terms being used to explain the situation The final accounts become all too

final, and a good business proposition is ruined by financial illiteracy

Preface

Imagine ERP and CRM software

that your people can actually use.

Microsoft DynamicsTM is business software

that works like Microsoft® Office.

Find out more at www.everyonegetsit.co.uk

© 2008 Microsoft Corporation All rights reserved.

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Financial Systems for Small Business –

Steve Farr, Microsoft Dynamics Product Marketing Manager

One of the key issues in describing or recommending systems for small businesses

is arriving at a reasonable description of what a small business is We could look

at turnover, staff numbers and their skill levels or ownership: and any of these would tell us that there are a lot of small businesses in the UK For example, The Department of Trade and Industry’s Small Business Service takes a broad view

of “fewer than 150 staff”, and this yields 1.7 million companies employing 12.6 million people (DTI, 2006) At Microsoft we use a measure of “fewer than

50 PC’s”, and this yields 1.2 million companies.

But both measures are crude, and as such hide the true nature of individual small companies And unless we understand the needs of the individual small company

we can not hope to suggest the IT systems most appropriate for running their business Let’s take two examples of small companies that would fit both definitions above

Company A is a stationery distribution business based in and serving the Slough area They have

a stock list that runs to thousands of items and process up to 400 orders a day through 3 telesales staff As well as managing stock levels their critical processes are in handling orders accurately, quickly and with price flexibility to meet customer expectations; and managing the delivery process with 3rd party logistics organisations so that they do not either under or over order capacity

on any given day Company A is part of a larger group with other locations in Swindon and Manchester Each location runs autonomously but performance is compared between them They employ a qualified accountant.

Company B is a plumber operating in rural North Wales His customers are members of the general public spread over a broad geographic area After a hard day on the road, bookkeeping consists of a pile of bills to pay suppliers and invoices to write to customers and post

The critical processes in this business are managing cash and ensuring that customers can get in contact and book appointments efficiently.

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Two very different “small businesses” but both of which may be looking for software that will help them manage their operations more efficiently The issue is that a system built for the needs of Company A is unlikely to be suitable for Company B and vice versa That is, unless we take a radically different view of how business systems are built At Microsoft Dynamics we have been doing just that.

There may seem to be little in common between the two companies, but in fact there are two constants – people and key performance indicators (KPI’s) In both companies people have tasks to complete, communication issues, status in the company, skill levels, work styles and responsibilities In both companies there are clear KPI’s that need monitoring constantly and will ensure success.

At Microsoft Dynamics we work around these two common components – people and KPI’s Rather than design around concepts such as General Ledger Journals or Order Processing, we instead design a user experience for The Accounts Receivable Clerk, the Sales Rep or a Sole Trader such as our plumber Screens do not give choices of functions but indications of the work outstanding for each of these

“Roles” as well as the KPI’s that this person is working to In the example of the Sales Order Clerk at Company A, a single screen would show the orders outstanding , and the customers to call (tasks) as well as the spare delivery capacity available and that clerks performance on product returns (KPI’s)

For our plumber the screen will be very different: numbers and values of invoices

to cut, orders to make, appointments to attend and bills to pay (tasks) and, vitally the KPI of cash at bank And it will be different in another aspect too because it probably won’t be on a PC Part of the definition of his role will be that he is mobile most of the time and that this information and functionality needs to be delivered

on a Windows Mobile device

By trying to differentiate systems requirements at the level of the individual role and the KPI’s that that role works to, Microsoft hopes to overcome many of the problems that have dogged small business systems over the years In particular, systems can overcome the huge diversity in what constitutes a small business, and don’t make the assumption that these businesses are not unsophisticated and in need of great functionality Steve Farr, Microsoft Dynamics Product Marketing Manager For more information please call 0845 6711 079.

So how am I so confident that few in business have much of a grasp of

finan-cial matters? And, assuming that to be true, why should their ignorance matter?

Taking ignorance first: I’m sure you won’t just take my word to prove my

point, but I have sat in front of thousands of businesspeople whose eyes clearly

glazed over as the merits of marginal costing were explained But ‘Did you

actually test their knowledge?’ would be a valid question to prove my point

Well, a couple of years ago I ran something we called the Business Brains Test

We invited businesspeople to take a series of short tests in various business

subjects online and anonymously Over a thousand did so, and the results were

revealing

The average score for the business public at large in the finance section of

the quiz was 41 per cent, an absolute fail, and the results revealed some

alarm-ing areas of weakness For example, nearly 80 per cent of those takalarm-ing the

test did not know what depreciation is Over half could not make a rudimentary

balance sheet calculation to show a business’s borrowing requirements This

would indicate that many owner managers might not have any real idea

what their accounts are actually telling them, particularly on matters of

prof-itability

I applied the same test to a control group of 168 people who had been

through the Business Development Programme run at Cranfield over two years

previously, so that any knowledge would not be too fresh They scored 92 per

cent, and so they should have; but did their scores matter a jot to the success or

otherwise of their businesses? Well, according to the post-programme

follow-up studies these companies:

■ grew more than four times as fast – by 54 per cent compared to 12 per

cent for privately owned businesses in general;

■ doubled their return to shareholders;

■ increased their profit growth at a much faster rate than prior to attending

It is also true that successful, fast-growing businesses fail But while the

fail-ures make the headlines and run to hundreds, tens of thousands of fast-growing

businesses quietly prosper Ask any receiver why businesses fail and he or she

will almost invariably put lack of financial skills of the boss near the top of the

list

The message seems pretty clear Finance is the language of business If you

learn that language and become more fluent you will improve your chances of

business success and reduce your chance of failure

This book is intended to help those who find business finance confusing A

heavy fog seems to descend as soon as anyone approaches this field for the first

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Are you sitting comfortably?

Why ergonomic working is essential for even the smallest business

Around 10.2 million working days are lost in the UK every year due

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In the light of this uncomfortable fact, it’s no surprise that the smartest businesses are increasingly realising the importance of creating a healthy working environment Ensuring wellbeing at

work – or ‘wellworking’ as it’s known, provides a wealth of

benefits, including increased efficiency, better productivity and improved health And whilst wellworking will help any business, it's particularly important for small businesses

Why are small businesses so at risk?

Start-up businesses often don’t invest in the right office furniture.

These same businesses require huge amounts of work to get them up and running, and all those long hours and late nights hunched in front of the computer on the wrong chair can quickly lead to back problems

Also, most small businesses rely heavily on a few people If one

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ergonomic working environment makes complete business sense

How to create an ergonomic working environment.

A huge array of wellworking products is now available, from brilliantly designed ergonomic furniture (such as the famous Aeron chair), through to sophisticated efficiency software that helps prevent Repetitive Strain Injury and other back and upper limb disorders

Choosing the right furniture and ergonomic accessories will help keep you and your business healthy, productive and profitable.

Luke Munro is Managing Director of Wellworking, the leading specialists in ergonomic working solutions – from office furniture and accessories to software and consultancy See www.wellworking.co.uk for more details.

*UK Health and Safety Executive figures for 2006-7

Seating that looks after your back, leaving you to look after your business.

xxiv Preface

time Whether you are running or setting up a business, getting a first taste of

responsibility for accounts or taking a business course, the first steps towards

an understanding of finance are the most difficult The consequences of failing

to understand business finance are not the same for everyone A student simply

fails an exam, while a businessperson all too often loses his or her business and

the executive gets fired; competition is generally greater today, and hence the

margin for mistakes smaller

The book is divided into four parts, the first of which begins by explaining

what financial data need to be collected and how, in order to be able to keep

track of business performance This bookkeeping process is an essential

pre-requisite for every type of business, and without it nothing of much value can

be established Bookkeeping itself is hardly a new concept Luca Pacioli wrote

what was in essence the world’s first accounting book 500 years ago to help

Venetian merchants keep tabs on their ventures (The ‘book’ was one of five

sections in Pacioli’s mathematics book entitled Everything about Arithmetic,

Geometry and Proportions.) Then there is an introduction to the key financial

reports – the cash flow statement, profit-and-loss account and balance sheet; all

too often, those trying to get to grips with the problems of poor profits and a

negative cash flow miss out these vital building blocks

The second part builds on this foundation, to show how the raw data can be

understood and used to control and direct a business successfully If you can

imagine trying to drive a car without any instruments at all, you will have some

impression of how unsatisfactory it would be to run a business without

finan-cial controls

Part 3, ‘Figuring out the future’, covers the field of budgeting and business

planning Most new ventures cannot get off the ground without a sound

busi-ness plan, and existing busibusi-nesses cannot grow without one A chapter within

this section is devoted exclusively to the important task of writing up and

presenting a business plan As this is the ‘ticket of entry’ to capital, it is

impor-tant for the business plan to look right

The final part of the book, ‘Dealing with regulatory authorities’, covers the

vexing and ever-changing area of taxation, the impact of legal structure on

accounting, and the responsibilities of directors in matters of finance Further

pressure for an awareness of financial matters has been applied by the

Insol-vency Act and wrongful trading legislation, which make it an offence for

direc-tors to continue trading once they know – or should know – that their business

is in trouble The problem is made more complex by the fast-changing nature of

the financial reporting standards that have been adopted in an effort to make

accounts more transparent and limit the opportunity for another Enron or

Inde-pendent Insurance slipping through the net

Preface xxv

I would like to record my appreciation of those ‘students’ who helped me to

focus on key financial issues and sharpen up my thinking generally In

particu-lar the MBA classes at Cranfield School of Management, Suffolk University,

Boston, and EM LYON Grande Ecole, the Graduate Enterprise Programme at

Stirling University and the Business Growth Programme also at Cranfield

Despite such illustrious assistance any omissions and errors are all my own

work!

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Assembling financial

data

1

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Helping to monitor performance

This book aims to empower its reader with basic knowledge to monitor and control the performance of an enterprise using financial matrices When running an enterprise, you soon realise that the basic measures and controls detailed in this book are just the beginning Many others exist, some common to all enterprises, others specific to enterprise type The key to them all is that they need to be monitored regularly and on a timely basis to maintain peak financial performance

The matrices or ‘Key Performance Indicators’ (KPI) are monitored and controlled with

a continual cycle of:

• calculate and report to identify errant KPI

• determine actions to be taken to rectify errant KPI

• undertake those actions

The regular reporting of KPI’s is greatly assisted by software capable of generating a

‘dashboard’ or ‘scorecard’ of KPI’s The software presents its data in an easily readable format so that wayward performance can be spotted early and corrected before damage is done Such software packages can be stand-alone, in which case they are linked to a business data processing system for data extraction, formatting and presentation Increasingly though, business data processing systems have their own functionality, as is the case with Acceptum Business Software.

Acceptum Business Software allows its users to create database extraction statements that provide enterprise KPI’s Including:

• Profit percentages • Days of stock held

• Current Ratio • Working Capital Circulation Plus, many more both generic and enterprise specific.

The extracted KPI data is incorporated into a ‘scorecard’ that can be annotated by managers to explain circumstances behind current performance Individual KPI results are used in a graphic ‘dashboard’ facility, allowing managers to easily monitor KPI’s specific to their job function The KPI data can be refreshed as frequently as desired – hourly, daily, weekly, etc Once established, the dashboard and scorecard are used continually to monitor KPI performance – that vital first step.

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Data processing system

The majority of large international companies now use a business data processing system generically known as ‘Enterprise Resource Planning’ – ERP This term is used

as the data representing the economic ‘resources’ of an enterprise are managed and controlled within the same integrated data processing system Thus, the data and processes supporting the accounting ledgers, stock control, purchase order processing, sales order processing and production order processing are all held and performed within the same integrated software package

This integrated approach results in accounting staff doing reduced levels of original data entry work, as the majority of ledger postings are automatically created when individual documents are posted by staff in originating departments Only supplier invoices and cash payments/receipts are handled directly by accounting staff The time saved by this approach allows accounting staff to perform more investigatory tasks, or even to be reduced in number, thereby reducing costs

Integrated ERP software systems have now filtered down to small and mid-tier enterprises that can purchase ERP systems for an affordable price, under £10,000 (at time of writing) The advantages of using an ERP system can be summarised as:

• no integration between software systems, reducing complexity

• no reconciliations between systems, reducing running costs

• master data is centrally held, so avoiding duplication and inconsistency

• data flows immediately across all areas, improving monitoring/control

• data is entered once at beginning of process and used many times

• everyone uses the same source data, eliminating inconsistancy

• instant data access enables ‘networked economy’

• provides focus on one software supplier for support and maintenance.

Acceptum Business Software is an ERP system for small and mid-tier enterprises providing modules covering:

• accounting ledgers and financial • development framework for reporting system customisation

• sales order processing • budgeting and forecasting

• purchase order processing • project costing

• production order processing • contact management

• stock control • KPI dashboard and scorecard

• fixed assets • time and billing

Acceptum has been built using a unified ledger approach That is, all accounts are

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held directly in the General Ledger, be they customers, suppliers, products, or typical expense and balance sheet accounts Why have we done this? Because, it eliminates the need for internal sub-system reconciliations and it greatly increases the reporting ability of the system Both, being major advantages to the user

With Acceptum’s unified ledger system, plus its flexible data reporting and drilldown facilities, management has an excellent tool for reviewing data and pin pointing those pertinent records within the mass of normal data.

Web site support

Enterprises with web sites can use Acceptum Business Software for their back office support function, whether the web site is hosted or in-house Enabling web orders to

be completed by standard business processes Data can be transmitted from the web site via File Transfer Protocol (FTP), e-mail in XML format, or basic file imports.

Data can also be exported from Acceptum for the web site to use File formats available are – Microsoft Excel, CSV, XML, etc So whether you are taking orders or just storing visitor contact details, Acceptum can help an enterprise to manage and control all its data.

Why Acceptum

Acceptum Business Software supports the processing requirements of an enterprise.

Being an organisation that understands the needs of small/mid-tier enterprises’, Acceptum is prepared to go that extra mile to achieve a client’s data processing goals and provide that vital element - system support You get a business partner, not just software!

Take control of your data with

an ERP management system for small/mid-tier enterprises download a full trial system for free

at

www.acceptum.co.uk

While bad luck plays a part in some business failures, a lack of reliable

finan-cial information plays a part in most All that needs to be done is for the

infor-mation on income and expenditure to be recorded and organised so that the

financial picture becomes clear The way financial information is recorded is

known as ‘bookkeeping’

But it is not just the owner of a company who needs these financial facts

Bankers, shareholders and tax inspectors will be unsympathetic audiences to

anyone without well-documented facts to back them up Keeping even the

simplest of records – perhaps as little as writing down the source of a deposit on

a slip or in your chequebook and recording the event in a book or ledger – will

make your relations with tax inspectors and bankers go much more smoothly

If you just pile your bills, receipts and cheque stubs into an old shoebox and

take it to an accountant at the end of the year (or when you run out of cash), it

will cost a lot more to get your accounts done than if you had kept good records

in the first place In addition, you will have had a stressful period of being

unsure of how well or badly you are doing

The accounts you have to keep

There are no rules about the format to be used for a bookkeeping system

Records can be on paper, in ledgers or on a computer You must, however, be

able to show where all your business income came from and who you have paid

and for what services If you are registered for VAT (see below) you will also

need to keep a record of the VAT element of each invoice and bill and produce

a summary for each accounting period covered by your VAT returns

1

Keeping the books

6 Assembling financial data

Starting simple

If you are doing books by hand and don’t have a lot of transactions, the

single-entry method is the easiest acceptable way to go This involves writing down

each transaction in your records once, preferably on a ledger sheet Receipts

and payments should be kept and summarised daily, weekly or monthly, in

accordance with the needs of the business At the end of the year, the 12

monthly summaries are totalled up – you are ready for tax time

Date Name Details Amount £ Date Name Details Amount £

1 June Balance Brought 450.55 4 June Gibbs Stock 310.00

17 June Jenkins Sales 190.25 22 June VV Mobile 53.24

Keeping the books 7

This simple record system is known as a ‘cash book’ – an example is given in

Table 1.1

In the left-hand four columns, the month’s expenses are entered as they

occur, together with some basic details and the amount At the head of the first

column is the amount of cash brought forward from the preceding month

On the right, expenses are listed in the same way The total of receipts for the

month is £1,480.15 and that for expenses is £672.01 The difference between

these two figures is the amount of cash now in the business As the business

shown in Table 1.1 has brought in more cash than it has spent, the figure is

higher than the amount brought forward at the beginning of the month The

figure of £808.14 is the amount that is ‘brought down’ to be ‘brought forward’

to the next month The total of the month’s payments and the amount ‘carried

down’ are equal to the sum of all the receipts in the left-hand columns

If there are a reasonably large number of transactions, it would be sensible to

extend this simple cash book to include a basic analysis of the figures – this

variation is called an ‘analysed cash book’ An example of the payments side of

an analysed cash book is shown in Table 1.2 (the receipts side is similar, but

with different categories) You can see at a glance the receipts and payments,

Date Name Details Amount £ Stocks Vehicles Telephone Other

4 June Gibbs Stock 310.00 310.00

8 Assembling financial data

both in total and by main category This breakdown lets you see, for example,

how much is being spent on each major area of your business, or who your

most important customers are The payments are the same as in Table 1.1, but

now we can see how much we have spent on stock, vehicles and telephone

expenses The sums total both down the amount columns and across the

analy-sis section to arrive at the same amount: £672.01 This is both a useful bit of

management information and essential for your tax return

If you are taking or giving credit, you will need to keep more information

than the cash book – whether it is analysed or not You will need to keep copies

of paid and unpaid sales invoices and the same for purchases, as well as your

bank statements The bank statements should then be ‘reconciled’ to your cash

book to tie everything together For example, the bank statement for the

exam-ple given in Table 1.1 should show £808.14 in the account at the end of June

Figure 1.1 outlines how this works

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Š’ȱ˜™¢ȱ

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ONLINE ACCOUNTING, PAYROLL

AND STOCK MANAGEMENT

Manage your business finances when & where you want

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SIMPLIFY YOUR BOOKKEEPING &

PAYROLL WITH LIBERTY ACCOUNTS

Managing your finances is one of the most challenging aspects of running a small business As well as recording transactions, producing invoices and making payments, you have to manage cash flow, make sure that staff get paid the right amount at the right time, submit statutory reports such as quarterly VAT returns and annual PAYE returns – and more Bookkeeping and payroll software should lighten the load, but it often does the opposite

Instead of simplifying and speeding up these processes, it creates extra layers of complexity Unless you are an accountant or bookkeeper, most accounting applications can be more trouble than they’re worth You have to wade through a host of features you don’t need to find what you do, manage software upgrades that cost you money and waste your time, and remember to backup your data and store it somewhere safe

Fortunately, the online approach to bookkeeping and payroll can offer you all of the advantages of traditional software and systems without the associated pain, which is why Liberty Accounts is increasingly popular with small business people If you can use an internet-based email system (such as Hotmail or Yahoo!) you can use this online accounting system

You can log onto Liberty Accounts any time from anywhere, as long

as you have access to the internet and a browser (such as Firefox or Internet Explorer) You don’t need the latest and greatest hardware and Liberty doesn’t care if you are using an Apple Macintosh or a PC;

because all of your data is stored, by Liberty, at a secure data centre, you can forget about backups or software upgrades; and unlike

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traditional accounting software, you wont have to buy a package then pay for repeated upgrades, because with Liberty you pay an affordable fixed monthly fee

As well as fitting in with the way you want to run your business, Liberty can grow with it ‘Ten years ago the only employee was me, but as we've grown we’ve taken on staff,’ says Keith Owen of Interactive Marketing Ltd, and it no longer made financial sense for him to manage his payroll manually ‘My time became too valuable,’

says the director, and because Liberty Accounts can handle payroll

as well as bookkeeping, it makes all aspects of the businesses finances easier to manage.

‘Liberty memorises the details for our regular monthly invoices and produces them automatically,’ enthuses Owen, and it’s easy to make adjustments ‘It used to take me two solid days to do the payroll for

my 55 staff,’ he adds, and now it takes three hours, and the PAYE year-end is also much easier ‘Previously it took me two or three weeks, and now it's done in a couple of hours.’

Liberty Accounts can also help you to get more from your bookkeeper

or accountant, because the online approach makes it easier to share information with them ‘I’ve used Liberty for almost a whole financial year, and it has transformed my business accounting,’ says Ann Lewis,

a leadership and executive coach ‘I have full access to my accounting history,’ she adds, ‘and because my accountant can also access the system directly the whole process is transparent, and problems are easy to sort out.’

If you want to make your bookkeeping and payroll less complicated contact Alan Wright at Liberty Accounts on 0845 230 9803

or visit www.libertyaccounts.com